5. You have just completed a $20,000 feasibility study for a new coffee shop in
ID: 2814732 • Letter: 5
Question
5. You have just completed a $20,000 feasibility study for a new coffee shop in some retail space you own. You bought the space two years ago for $100,000, and if you sold it today, you would net $115,000 after taxes. Outfitting the space for a coffee shop would require a capital expenditure of $30,000 plus an initial investment of $5,000 in inventory. What is the correct initial cash flow for your analysis of the coffee shop opportunity?
6. A proposed new project has projected sales of $156,000, costs of $119,000, and depreciation of $4,500. The tax rate is 35 percent. Calculate operating cash flow.
7. You purchased a machine for $1 million three years ago and have been applying straight-line depreciation to zero for a seven-year life. Your tax rate is 35%. If you sell the machine today (after three years of depreciation) for $700,000, what is your after-tax cash flow from selling the machine?
8. Castle View Games is opening a new division that will develop software. Since it is a new division, there is currently no net working capital invested. The CFO has projected the following amounts for current assets and current liabilities for the division. Cash:$6,000; Accounts Receivable:$21,000; Inventory:$5,000; and Accounts Payable: $18,000. Calculate the net working capital investment that will be required for the software division.
9. You are considering making a movie. The movie is expected to cost $10 million up front and take a year to produce. After that, it is expected to make $5 million in the year it is released and $2 million for the following four years. If you require a payback period of two years, will you make the movie?
Explanation / Answer
1)
We ignore the feasabilty study cost as it is a sunk cost
Initila cash flow = 115,000 + 30,000 + 5,000 = $150,000
It should have a negative sign as it is a cash outflow
6)
Operating cash flow = ( sales - costs - depreciation)(1 - tax) + depreciation
Operating cash flow = ( 156,000 - 119,000 - 4,500)( 1 - 0.35) + 4,500
Operating cash flow = $25,625
7)
Annual depreciation = 1,000,000 / 7 = 142,857.143
Book value after 3 years = 1,000,000 - ( 142,857.143 * 3) = $571,428.571
After tax cah flow = Sale value - tax ( book value - sale value)
After tax cah flow = 700,000 - 0.35 ( 700,000 - 571,428.571)
After tax cah flow = 700,000 - 45,000
After tax cah flow = $655,000
8)
Net working capital = Current asset - current liability
Net working capital = 6,000 + 21,000 + 5,000 - 18,000
Net working capital = $14,000
9)
Cumulative cash flow for year 0 = -10,000,000
Cumulative cash flow for year 1 = -10,000,000 + 5,000,000 = -5,000,000
Cumulative cash flow for year 2 = -5,000,000 + 2,000,000 = -3,000,000
Cumulative cash flow for year 3 = -3,000,000 + 2,000,000 = -1,000,000
Cumulative cash flow for year 4 = -1,000,000 + 2,000,000 = 1,000,000
1,000,000 / 2,000,000 = 0.5
Payback period is 3.5 years
You will NOT make the movie as payback is more than 2 years
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